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Jun 9, 2022
Min Read

Here’s Why You Should Automate KYC Compliance With AI

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super.AI
Chief AI for Everyone Officer
SUMMARY

Anti-money laundering (AML) requirements have grown increasingly strict and complex in recent years. Customer due diligence (CDD) has created a massive administrative burden for businesses in the financial and other sectors. However, Know Your Customer (KYC) automation offers a time and cost-efficient solution.

What is KYC?

Know Your Customer (KYC) is a set of standards that make it mandatory to verify your customer’s identity before they open an account with your business. These regulations also require organizations to assess each customer's suitability and to examine any risks involved in maintaining a business relationship with a client.

By law, all customers need to provide:

  • A valid picture ID
  • Proof of address

Organizations in the regulated sector need to verify these documents to help battle fraud, money laundering, and other illegal activities. KYC is an umbrella term that covers these regulations. However, two other vital concepts fall under its remit. These are:

Customer due diligence (CDD): Customer due diligence requires organizations to verify each customer’s identity and assess their risk for money laundering, fraud, and financing terrorism. These checks are carried out by checking the customer's identity documents, photography, utility bills, etc.

Anti-money laundering (AML): AML regulations were designed to stop criminals from turning illegal gains into legitimate money. Additionally, these laws also target tax evasion, trading of illicit goods, and market manipulation.

Why is KYC important to your business?

KYC checks present a lot of challenges for businesses in the regulated sector. However, the consequences of non-compliance are considerably worse. KYC helps businesses know what kind of customers they are serving. Complying with these regulations helps:

  • Reduce fraud and money laundering
  • Meet local and international business standards
  • Mitigate the risk of fines, liabilities, and reputation damage

Two of the most significant areas that KYC regulations protect against are:

Identify fraud: Identity fraud can take many forms. It can involve using another person’s documents to open accounts for purposes of obtaining credit or money laundering. Alternatively, it can concern a customer submitting forged or faked documents to facilitate similar criminal activities.

Age fraud: Companies that offer age-restricted products or services must ensure their customers are legally old enough for these transactions. Age fraud occurs when someone submits forged or stolen documents to pass as old enough to use these services.

There are moral risks involved in allowing minors to avail of age-restricted products. Additionally, any business that fails to comply with these laws can face heavy fines.

What businesses need to adhere to KYC regulations?

All companies in the regulated sector need to abide by KYC regulations. While most of the focus on KYC is around banks and financial institutions, these rules apply to many organizations and industries. Some of the businesses that need to verify the customer's identity and report suspicious transactions are:

  • Businesses in the financial sectors, like banks, credit institutions, investment funds, electronic money institutions, and life insurance companies
    Currency exchanges, money transmission services, and check cashing businesses
  • Auditors, accountants, and tax advisors
  • Casinos and bookmakers
  • Estate agents and letting agents
  • Art dealers and dealers in high-value goods
  • Adult websites

For more information about which companies are required to meet KYC, AML, and CDC regulations, you can read:

The problems with manual KYC

The regulatory landscape is complicated. Businesses in the regulated sector are under a lot of pressure to follow the rules set forth by governments on a local, regional, and national level. Many institutions are caught between providing a satisfactory customer onboarding experience and meeting these strict requirements. Manual KYC presents a lot of different challenges, as outlined below.

Manual data-entry

Manual KYC is labor-intensive. It requires collecting and processing customer information and documents and inputting them by hand. Human error is a significant problem here that can lead to fines and non-compliance in the worst scenarios.

Time-consuming

Manual KYC takes a lot of time. Checking and processing documents is a lengthy process. Additionally, following up with customers to confirm errors adds to a considerable amount of time spent complying with these measures.

Administrative costs

Manual KYC costs businesses millions of dollars each year. Staff, technology, and third-party verification services are just some of the associated administrative costs.

Security

Cybercrime and data breaches are on the rise. GDPR requirements place the burden of securing customer data on the institution. Failure to manage customer data can lead to hefty fines and reputational damage.

Customer experience

As mentioned above, manual KYC requires firms to invest a lot of time. In some instances, it can take weeks or months to verify a customer's details. These delays can create a negative and frustrating experience for customers, leading them to bring their business elsewhere.

Fast-moving regulatory landscape

The regulatory landscape is forever-evolving. Many businesses struggle to keep up with the fast-changing environment. However, failure to comply with current rules is penalized by stiff fines.

What is KYC automation?

KYC automation is a process that allows businesses to meet regulatory requirements by using AI and machine learning. Instead of leaning on internal administration, companies can perform an automated KYC check in a cost-effective, time-effective, and more accurate way.

Intelligent document processing (IDP) makes it possible for organizations to process unstructured data, like:

  • Documents
  • Forms
  • Text
  • Images
  • Video

When combined with KYC machine learning and AI, companies can extract patterns from data. As more input is fed through the system, KYC automation becomes more accurate and efficient at detecting fraudulent documents and suspicious activities.

What processes does an automated KYC check cover?

An automated KYC check covers the main processes involved in onboarding new customers. Here is a detailed list of the tasks that KYC automation can help with.

Image quality checks

Bad image quality slows down the verification process. Smudged, unclear, or improperly taken photos of IDs and documents are widespread. When low-quality images are identified by administrative staff, it results in requests for new copies, which can add days or even weeks to the onboarding process.

Automating KYC checks with AI means employees no longer have to review document images and then write back to customers. These systems can recognize problems as soon as documents are uploaded, and immediately ask users to remedy the issue. This setup reduces the time it takes to get usable document images from customers.

Verification

Traditional verification requires manual review. As we’ve mentioned, this takes time, especially during busy periods. Again, in scenarios where the documents or ID is inaccurate or contested, this can result in lengthy delays.

KYC automation can verify documents with a high degree of accuracy. Businesses can train KYC machine learning programs to interpret images and documents and verify them quickly. Instead of requiring a specialist with a vast amount of experience in spotting, for example, fake documents, AI can check uploaded data and ensure the information presented is legitimate.

Fraud detection

Fraud detection is an essential part of the KYC process. Businesses in the regulated sectors need to protect against money laundering and fraud by ensuring that criminals and bad actors don’t make legitimate appearing transactions by using false documents and information.

Humans can struggle to detect images that have been digitally altered or manipulated. KYC compliance tools are designed to detect giveaway signs of false documentation. By spotting and highlighting these documents, AI can stop people from opening up accounts with fake documents.

Using KYC machine learning models means organizations can avoid the fines and penalties involved in facilitating fraudulent transactions. Additionally, it can reduce the chances of handing out loans or credit to fraudulent actors.

Document digitization

In the traditional KYC setup, documents and images are checked, verified, and evaluated for fraud. Once these stages have been passed, a human operative needs to input the data so it can be indexed and stored.

KYC compliance software can automate this process. By removing this responsibility from staff, you can reduce human error, boost security, and save valuable time.

The benefits of KYC automation

As you can see, KYC automation can help the onboarding process in several ways. However, there are plenty of other business benefits that you can unlock by using AI and machine learning to meet regulatory and compliance obligations.

Cost savings

KYC automation can save businesses huge sums of money. Reducing heavy reliance on staff can reduce onboarding costs by as much as 70%.

Additionally, each automated KYC check is more accurate. Less data-entry mistakes mean less rectification, which also reduces operating costs and the risk of non-compliance fines.

Reduced errors

Human error is unavoidable. However, it can cost your business a lot in this regulatory landscape.

KYC automation reduces human involvement considerably. Limiting human input to areas requiring specific decisions can drive error rates down to 0%.

Reduced risk

KYC automation manages user documents and data. As mentioned above, human interactions are reduced. In a cyber security context, this also mitigates the risks of data breaches because humans are the most vulnerable point of digital security.

Reduced backlog

Manual KYC processing is time-intensive. Organizations can easily fall behind, leaving a huge backlog of documents to process. Modern consumers are impatient, and excessive delays can lead them to take their business elsewhere.

Enhanced compliance

Non-compliance with KYC has cost businesses in the regulated sector billions of dollars in fines. KYC automation ensures your organization is compliant.

Improved customer relations

KYC automation provides customers with a quick and easy way to upload their documents. Manual KYC can be slow and laborious. Limited operational hours, backlogs, and frequent back-and-forth communication can all add to the process.

An automated KYC check allows for the streamlined, frictionless experience that customers expect. By reducing the roadblocks involved with opening an account, businesses can onboard users more swiftly, leading to positive feelings that drive trust and loyalty.

Reduce turnaround

Humans work for a limited amount of hours per day. However, KYC automation can run 24/7, 365 days a year. Customer onboarding can take place whether you are in the office or not. An always-on service meets customer expectations.

Scalability

Scalability is an essential concept for new businesses. Any company can serve more customers by adding more resources. However, if you need your business to scale, you need to increase revenue but add proportionally fewer resources.

KYC automation tools allow businesses to meet increased demands without adding more staff. As your business grows, your profits grow with it.

Better security

Governments primarily introduced KYC regulations to hinder criminal activities. While this has created an administrative burden for businesses in the regulated sector, there are operational benefits for businesses too.

Banks lose billions of dollars per year through customer fraud. An automated KYC can check documents against several databases. These processes are highly accurate and don’t miss out on fine detail. Additionally, you can employ KYC machine learning processes to spot customers who pose a credit risk.

Free up your resources

A lot of media coverage on AI is centered around worries that it will take people's jobs. However, the reality is that it will be used to help augment human decisions and free up staff from boring or repetitive tasks.

By reducing the amount of time your employees spend on mundane tasks, you let them concentrate on more fulfilling or creative activities. Reducing administrative duties allows you to redirect your staff towards more value-driven work that can drive revenues.

Getting started with AI-automated KYC compliance

KYC rules have created a significant responsibility for many businesses in the financial and regulated sectors. Complying with these rules has added administrative costs and slowed down customer onboarding at a time when consumers expect quick and straightforward transactions.

KYC automation offers businesses a way to meet these obligations. Advanced KYC machine learning tools can analyze, verify, and digitize documents cost-effectively, accurately, and swiftly. By reducing staff overheads and human error, businesses can help the battle against fraud and money laundering while avoiding hefty fines that result from non-compliance. For more information, check out the following resources:

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